FLCo,a U.S.corporation,has $250,000 interest expense for the tax year.None of the interest relates to nonrecourse debt or loans from affiliated corporations.FLCo's U.S.and foreign assets are as follows.

How should FLCo allocate and apportion its interest expense between U.S.and foreign sources in order to maximize its FTC for the current year?

Question

FLCo,a U.S.corporation,has $250,000 interest expense for the tax year.None of the interest relates to nonrecourse debt or loans from affiliated corporations.FLCo's U.S.and foreign assets are as follows.

How should FLCo allocate and apportion its interest expense between U.S.and foreign sources in order to maximize its FTC for the current year?

Quizplus · Accepted Answer

The taxpayer is required to use either the fair market value or the tax book value of the assets to allocate and apportion the interest expense between U.S.and foreign sources.The taxpayer may not use a mix of the methods.Using the Tax Book Value method results in less interest expense being allocated against foreign-source income.This will maximize the FTC since the numerator of the FTC limitation formula will be larger in this case.
Tax book value method
$250,000 F1F1F1S1F1F1F10 [$2,000,000/($2,000,000 + $1,000,000)] = $166,667 interest expense allocated and apportioned to U.S.-source income,with the remainder of $83,333 allocated and apportioned to foreign-source income.
Fair market value method
$250,000 F1F1F1S1F1F1F10 [$5,000,000/($5,000,000 + $10,000,000)] = $83,333 interest expense allocated and apportioned to U.S.-source income,with the remainder of $166,667 allocated and apportioned to foreign-source income.

FLCo,a USCorporation,has $250,000 Interest Expense for the Tax Year